3. Persons turning age 69 in 2003 must
YEAR-END TAX PLANNING mature their RRSP into cash, an an- IN THIS ISSUE
64(1) nuity or a Registered Retirement In-
come Fund by December 31, 2003. YEAR-END TAX PLANNING
Certain 2003 excess contributions 2003 REMUNERATION
may be deducted in the year 2004 if
contribution room is available. EMPLOYMENT INCOME
4. If you own a business, consider pay- BUSINESS/PROPERTY INCOME
ing a reasonable salary to family CAPITAL GAINS AND LOSSES
Some 2003 year-end tax planning tips members for their services rendered CORPORATE TAX
include: to the business.
1. If the following expenditures are 5. Ensure that all deductible alimony or
maintenance payments are made by MARRIAGE BREAKDOWN
made by individuals by December
31, 2003 they will be eligible for December 31, 2003. FARMING
2003 tax deductions: moving ex- 6. An individual whose 2003 net income WEB TIPS
penses, child care expenses, safety exceeds $57,879 will lose all, or part, GST
deposit box fees, charitable donations, of their old age security.
political contributions and medical DID YOU KNOW...
Senior citizens will begin to lose their
income tax age credit if net income prior to the yearend. This capital loss
2. 2003 eligible Registered Retirement exceeds $28,193. may be offset against capital gains in
Savings Plan (RRSP) contribution
Individuals facing these problems the year, or in the three preceding
amounts are noted on the 2002 per-
should contact their professional advi- years.
sonal income tax return assessment
sors for assistance in managing their 9. If income in an inter vivos trust is to
notices. You have until March 1,
2003 personal income. be taxed on a beneficiary's return, the
2004 to make tax deductible RRSP
contributions for the 2003 year. 7. Consider purchasing assets eligible income must be paid or payable to
for capital cost allowance before the the beneficiary by December 31,
Consider contributing to a spousal
yearend. For example, employees 2003.
RRSP to achieve income splitting in
may claim capital cost allowance on 10. Individuals may claim a tax credit
automobiles, aircraft and musical in- related to the interest portion of stu-
The maximum 2003/2004 additions to struments required to be used in their dent loan payments made in 2003.
deductible RRSP contribution room employment.
are $14,500 and $15,500 respectively. 11. Registered Education Savings Plan
8. If you had taxable capital gains in the (RESP)
The 2004 contribution requires 2003
year, or any of the preceding three
earned income of $86,111 ($86,111 x A Canada Education Savings Grant
18% = $15,500). years, consider selling capital proper-
ties with an underlying capital loss (CESG) for RESP contributions will
be permitted equal to 20% of annual
Tax Tips & Traps
2003 FOURTH QUARTER ISSUE NO. 64 PAGE 1
contributions for children (maximum 16. A refund of Employment Insurance receipts subject to clawbacks, such as
$400 per child per year). paid for non-arm’s length employees old age security, the age credit, child
12. Health and dental premiums for the may be available upon application. tax benefits, GST credits, etcetera.
self-employed 8. Salary payments require source de-
Individuals will be allowed to deduct 2003 REMUNERATION ductions to be remitted to Revenue
amounts payable in respect of the year Canada on a timely basis.
for Private Health Service Plan cov- 9. Individuals that wish to contribute to
erage in computing business income Some general guidelines to the Canada Pension Plan or a Regis-
provided they are actively engaged follow in remunerating the tered Retirement Savings Plan may
alone, or as a partner, in their busi- owner of a Canadian- require a salary to create "earned in-
ness, and either self-employment is controlled private corpora- come".
their primary source of income or tion earning "active business
income" include: 10. Salaries paid to family members must
their income from other sources does be reasonable.
not exceed $10,000. 1. In general, bonus down active busi-
11. Some provinces have "payroll taxes"
13. Tax on Split Income ness earnings in excess of the annual
thereby increasing the costs of paying
business limit - $225,000 for a De-
The Income Tax Act applies the salaries versus dividends.
cember 31, 2003 yearend. Leaving
maximum marginal tax rate to cer-
corporate active business income
tain passive income of individuals
over this amount may present a tax EMPLOYMENT INCOME
under the age of 18.
deferral but there will likely be an
This includes: overall higher tax to pay when divi-
1. Taxable dividends, and other dends are finally paid out. Some SPECIAL WORKSITE
shareholder benefits, on companies may find it advantageous An employer may make non-taxable
unlisted shares of Canadian to have greater than , say, $225,000 board and lodging payments to an em-
and foreign companies (re- of active business income because of ployee at a special worksite.
ceived directly or through a other federal and provincial tax incen-
trust or partnership); and tives. Caution!
2. Income from a partnership or 2. Elect to pay out tax-free "capital divi- In an August 14, 2003 Tax Court of Can-
trust where the income is de- dend account" dividends. ada case, the taxpayer was employed to
rived from providing goods or 3. Consider paying dividends to obtain a work at a “special worksite” but, did not
services to a business carried refund of "refundable dividend tax receive payments from the employer for
on by a relative of the child or, on hand". his board and lodging. The taxpayer took
of which the relative partici- the position that had he been paid these
4. Corporate earnings in excess of per- amounts they would be tax-free. There-
sonal requirements could be left in the fore, the incurring of expenses related to
Therefore, consider minimiz- company to obtain a tax deferral. this “special worksite” should be deducti-
ing this type of income in The effect on the "Qualified Small ble.
2003. Business Corporation" status should
be reviewed before selling the shares. Unfortunately, the Court did not agree.
14. The tax rate for higher income indi-
viduals is now significantly lower on 5. Dividends, as opposed to salaries, will Editor’s Comment:
capital gains than on dividends reduce an individual’s cumulative net It may have been better to have part of the
thereby presenting an incentive to re- investment loss balance thereby pro- remuneration paid separately as “board,
ceive capital gains. viding greater access to the capital lodging and transportation” expenses at
15. Canadian resident shareholders re- gain exemption. the special worksite.
ceiving shares in foreign tax-free re- 6. Retaining income in the corporation
organizations will be able to treat the may effect provincial and federal COMMISSION SALESPERSON
shares as a reduction in adjusted cost capital tax and certain provincial In a July 14, 2003 Internal Technical
base, as opposed to a taxable divi- clawbacks. Interpretation, CCRA concluded that a
dend. commission salesperson may deduct in-
7. Excessive personal income affects
Tax Tips & Traps
2003 FOURTH QUARTER ISSUE NO. 64 PAGE 2
ternet fees if the fees are paid to earn 3. The taxpayer paid salaries to other
commission income. However, internet persons - a further indication of the
fees were not deductible by regular em- 64(4) limited degree of control exercised by
ployees. the construction company.
EMPLOYEE VS. INDEPENDENT
TIPS CONTRACTOR Editor’s Comment
In a June 30, In a June 26, 2003 Tax Court of Canada There are serious implications for the
2003 Tax Court case, the taxpayer was a “supervisor” with payer if CCRA successfully challenges the
of Canada case, a construction company but filed his tax “independent contractor” status. A CCRA
CCRA included return as an independent contractor and Ruling could be considered.
tip income on deducted expenses accordingly. CCRA
the taxpayer’s argued that the individual was an employ- CAPITAL GAINS AND LOSSES
return of $918 for 1993 and $4,785 for ee and his deductions were restricted.
1994 rather than the $102 and $2,214 that 64(5)
the taxpayer claimed were the actual Good News! GUARANTEEING
amounts of the tips. CCRA’s calculation The Court found that the CHILD’S DEBTS -
was based on the taxpayer’s pro-rata per- individual was an “inde- OUCH
centage of the tips received by the restau- pendent contractor”, not an
rant based on her percentage of salary as In a June 10, 2003 Tax Court of Canada
“employee”, and noted that: case, the mother had guaranteed the debts
compared to the total salaries paid. The
tips received by the restaurant were based 1. Control Test - There was very little of her son’s corporation. The son’s corpo-
on the average percentage of tips paid to control over the services provided by ration was unsuccessful and the mother
waitresses on sales at the restaurant of the taxpayer - “Not once did they paid off the loans over the years 1989 to
11.24%. check to see if I was there, or told me 1993 and claimed business investment
to be there at any set time or date.” loss deductions.
The Court agreed with CCRA and noted
that they found the taxpayer’s evidence 2. Ownership of Tools - The taxpayer The sole motivation for the guarantee was
evasive and did not discharge the onus of owned his own hand tools, forms, to help her son. No guarantee fee was
proving CCRA’s assessment incorrect. scaffolding, and provided his own charged and no possibility of income was
INDIVIDUAL PENSION PLANS 3. Chance of Profit and Risk of Loss - Therefore, the Court disallowed the moth-
(IPPs) Even though the taxpayer had re- er’s business investment loss on the basis
A 62 year old person who had been max- sponded to a question from the field that the guarantees were not incurred to
imizing RRSP contributions every year auditor that he had, “no chance of earn income.
established an IPP in his corporation for profit”, upon investigation in Court, it
2003. The deductible corporate contribu- was determined that he “wasn’t think- Editor’s Comment
tions for 2003 are - past service $109,600, ing properly” when he answered this Charge a guarantee fee next time.
current service $22,400, for a total of question. In fact, there was evidence
$132,000. For 2004 and 2005 the deduct- that a profit or loss did apply in his
ible contributions are $24,100 and case. CORPORATE TAX
$25,900 respectively. The deductible con- 4. Integration - The taxpayer was pro- 64(6)
tributions will vary, depending on the tax- viding the services as a person in
payer’s circumstances. These tax deducti- business on his own account.
ble contributions are considerably greater The Income Tax Act has rules that “asso-
The Court was also influenced by:
than would be available with an RRSP. ciate” two corporations that have the
These Plans are complicated and require 1. The wording of the actual contracts same de facto control. Therefore, they
actuarial calculations. They are generally between the construction company have to share the small business deduction.
beneficial to individuals over age, say, 40 and the taxpayer.
earning a base salary of more than For example, if Mr. A and Mrs. A each
2. The taxpayer had income from other own a corporation and there is no signing
sources in previous years. authority, or business transactions, or
shareholdings between the two corpora-
Tax Tips & Traps
2003 FOURTH QUARTER ISSUE NO. 64 PAGE 3
tions, it is arguable that the companies are taxpayer moved and, because of employ- children and successfully claimed a medi-
not associated. Therefore, the family ment commitments, the spouse joined the cal expense credit of $42,662.
could have two small business deductions. taxpayer three years later. Therefore,
A doctor certified that the children re-
three years after the change of employ-
The corporations should strive for sepa- quired the equipment, facilities and per-
ment, the old house was sold and the tax-
rate and distinct financing, customers, sonnel specially provided by this Acade-
payer successfully deducted the selling
employees, offices, business licenses, my.
cost as a moving expense.
Workers Compensation registration, GST
registrations, CPP and EI and source de- INTEREST ON A STUDENT LOAN
MEDICAL EXPENSE - HARDWOOD
duction registration and any other stand- FLOORING Interest paid on a student loan made un-
alone issue. der the Canada Student Loans Act or a
In a June 17, 2003 Tax Court of Canada
provincial statute is eligible for a tax cred-
Professional advice is needed in this area. case, the taxpayer incurred expenses of
approximately $11,000 in 1999 to install
DISSOLUTION FOR FAILURE TO hardwood flooring which was successfully In a June 27, 2003 Tax Court of Canada
FILE ANNUAL RETURNS claimed as a medical expense. The floor- case, the taxpayer took out a “new loan”
In a June 10, 2003 Tax Court of Canada ing was acquired because the taxpayer’s to repay a loan subject to the Canada Stu-
case, the corporation was struck in the spouse suffered from serious allergies. dent Loans Act.
late 1980s for failing to file Annual Re- The doctor noted that, “because of signifi-
turns but was revived in February, 1999 cant health impairment... the spouse was Bad News!
under an Application unable to be functional in his home until The interest on the “new loan” is not eli-
for Revival. the carpets were removed and replaced gible for the tax credit.
MEDICAL EXPENSES - MARRIAGE BREAKDOWN
The Court noted that
the Certificate of ATTENDANT CARE 64(8)
Revival did not have In a July 3, 2003 Technical Interpreta-
the effect of reviving the corporation ret- tion, CCRA notes that where a senior citi- RRSP TRANSFER
roactively. The corporation was simply zen pays for various homecare services, The Income Tax Act permits a tax-free
non-existent at this time. The income such as meal preparation and laundry, the- transfer of an RRSP from one spouse to
earned belongs to the owner who generat- se expenses could qualify as “attendant another as a division of property in a “set-
ed that income through his activity. care expenses” and be eligible as medical tlement of property or support rights” in a
expenses if the taxpayer is entitled to the marriage breakdown.
PERSONAL TAX disability tax credit. Only attendant care
RETROACTIVE CHILD SUPPORT
expenses that do not exceed $10,000 for
64(7) the year ($20,000 in the year of death) The British Columbia
qualify for the credit. Supreme Court recently
DISABILITY TAX CREDIT (DTC) - required Mr. G to pay a
NEWBORN Depending on the situation, eligible tasks retroactive child care
In a July 9, 2003 Tax Court of Canada could include meal preparation, house- payment of $641,842
case, the taxpayer’s son was born on No- work, transportation, and personal services ($3,565/mo. for 15 years) because he did
vember 27, 1993 without a left hand. The such as banking and shopping. However, not fully disclose his wealth and income
Court found that a missing left hand is a attendant care expenses would not normal- when the original $500/month child sup-
disability that qualifies for the DTC trans- ly include a payment to a person employed port agreement was made.
fer to the parent. to do a specific task, such as a drycleaner.
MOVING EXPENSES MEDICAL EXPENSE - SCHOOL FARMING
In a June 64(9)
12, 2003 In a July 8, 2003 Tax Court of Canada
Technical case, in the year 2000 the taxpayer paid GRAVEL SALE
Interpreta- tuition fees and room and board to an In a 2003 Advance Income Tax Ruling,
tion, CCRA reviewed a situation where a Academy for his two attention deficit CCRA Ruled that where a farm corpora-
Tax Tips & Traps
2003 FOURTH QUARTER ISSUE NO. 64 PAGE 4
tion owns land with gravel, when the cor- allowances to each of its employed vehicle
poration sells all the gravel for a lump salespersons. The Excise Tax Act permits
sum the proceeds received will be a capi- 64(10) an ITC of 7/107th of the reasonable al-
tal gain not regular income. Capital gains lowances paid.
are only 50% taxed. USED CAR VALUATION
http://www.gmcanada.com/english/financi Good News!
However, in an August 29, 2003 Tech- ng/fin_financ.html The Court found that the allowances were
nical Interpretation, CCRA note that based on kilometres driven and were rea-
where an individual receives an amount If you are looking for values of used vehi-
sonable. Therefore, the ITCs were
based on the shale extracted from the cles, this site is perfect for you. On the left
property, the amount received will be con- hand column of the website is a link
sidered income because it is based on pro- named “Appraise Your Vehicle” that will INPUT TAX
duction. take you to the “Canadian Black Book” CREDITS
In a January 15,
SALE OF TREES
2003 Tax Court
In a July 22, 2003 GST of Canada case, the taxpayer carried on a
Technical Interpre- courier proprietorship business. CCRA
tation, CCRA notes 64(11) successfully disallowed some of the input
that where a farmer tax credits on the basis that the taxpayer
receives an amount did not keep a log for the use of his vehi-
for allowing someone to cut and remove GST is payable on the selling price when a
person is acting as an agent in making a cle or receipts for his entertainment ex-
timber from his/her farm, the gain on the penses.
sale may be a capital gain, not regular sale on behalf of a supplier.
income, if all of the following conditions On August 18, 2003 CCRA introduced 17-
are satisfied: page Publication P-182R - Agency which
DID YOU KNOW...
(a) the taxpayer did not acquire the discusses this. It also provides four ex- 64(12)
property with the intention of selling amples.
the timber or land; Example 1 reviews a property manage- PENALTY SYSTEM (AMPS)
(b) the sale agreement is an isolated ment company which manages a number
The AMPS system was fully implemented
transaction; of residential apartment buildings for vari-
by CCRA on October 7, 2002 to assess
ous landlords. Example 2 reviews a cost-
(c) the price is a fixed amount; penalties for non-compliance with Cus-
sharing arrangement where three profes-
(d) the timber is removed over a short toms laws. These penalties are signifi-
sionals share office space and operating
period of time; and cantly higher than previous.
expenses. Example 3 and 4 reviews a
(e) the purchase price does not depend contract which includes a reimbursement A non-compliant taxpayer could face in-
on the use or production of the land. of expenses. creased monetary penalties, increased
audit activity, inspections and seizures, as
INPUT TAX CREDITS (ITC)- well as loss of importing privileges.
CCRA’s Voluntary Disclosure Program
In a July 22, 2003 Tax Court of Canada
will allow importers to come forward and
case, Melville Motors Ltd. paid mileage
avoid AMPS penalties.
The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances
and exceptions in a commentary such as this, a further review should be done. Every effort has been made to ensure the
accuracy of the information contained in this commentary. However, because of the nature of the subject, no person or
firm involved in the distribution or preparation of this commentary accepts any liability for its contents or use.
Tax Tips & Traps
2003 FOURTH QUARTER ISSUE NO. 64 PAGE 5